BOE Officials Reinforce Rate Hike

Business

Bloomberg Markets and Finance 11 October, 2021 - 02:35am

Read full article at Bloomberg Markets and Finance

The Bank of England Risks Hiking Too Far Ahead of the Fed

Yahoo Canada Finance 12 October, 2021 - 01:00am

Reacting to the wrong type of inflation and slamming the brakes on economic recovery could result in self-inflicted harm for the U.K.

To the swiftest? Maybe not for central bankers.

Gilts, which U.K. Treasury bonds are called, have been the worst-performing major fixed-income market over the past two months, with the 10-year yield doubling to 1.2%. That is not a vote of confidence in the Bank of England’s communication efforts.  

Currency Traders Are Betting the Bank of England Is About to Make a Mistake

Bloomberg 11 October, 2021 - 10:17am

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Explainer-Why is the Bank of England talking about raising rates?

Reuters 11 October, 2021 - 07:32am

Michael Saunders, another Monetary Policy Committee member, said it was “appropriate” that markets had started to price in rate hikes much sooner than previously.

Here are some of the questions about the outlook for interest rates in the world’s fifth-biggest economy.

Investors are betting the BoE could raise its benchmark Bank Rate from a record low of 0.1% possibly as soon as its Nov. 4 meeting, ahead of its U.S. and euro zone peers and following in the footsteps of central banks in Norway and New Zealand.

Financial markets are pricing at least two more hikes in 2022.

But some economists, concerned by a loss of momentum in Britain’s economy as it runs into post-lockdown shortages of supplies and staff, think the BoE will be forced to tighten policy only very gradually.

While Britain shares its supply chain problems, soaring energy prices and labour shortages with many countries around the world, investors have singled it out as a country especially prone to inflation and higher policy rates, with Brexit exacerbating the bottlenecks.

In recent weeks, Britain’s limited stocks of natural gas left it heavily exposed to rocketing wholesale prices, while a deficit of truckers left fuel pumps dry across the land.

The BoE said last month that consumer price inflation was on course to exceed 4% at around the end of the year and since then fuel prices and household energy costs have risen further.

Huw Pill, the BoE’s new chief economist, has said he is concerned that inflation would prove to be less transitory than the central bank had hoped.

GRAPHIC-UK inflation on track to hit double BoE's 2% target

No. Governor Bailey has said the BoE can do nothing about supply chain bottlenecks which have pushed up inflation. Similarly, energy prices are beyond the BoE’s control.

But some BoE officials appear worried that individuals and businesses might lose confidence in their ability to control inflation if they do not act soon.

The public increasingly appear to expect prices will rise more quickly and Prime Minister Boris Johnson has promised he will deliver a high-wage economy. But a Bank of America survey last week showed no expectations of higher wages, suggesting little risk so far of a damaging, 1970s-style wage-price spiral.

GRAPHIC-UK public inflation expectations lurch higher: Citi/YouGov

Some economists think the BoE should wait to make sure that higher rates would not further slow the economic recovery.

The government ended its jobs support programme while an estimated 1 million people were still on it and household budgets are due to be squeezed next year.

Along with higher energy bills, taxes are set to rise on workers to pay for health and social care, while state benefits have just been cut by the largest amount on record as the government ended another of its pandemic support measures.

There have also been signs that households may now be saving again in aggregate, rather than spending.

History is replete with instances of economic recoveries curtailed by premature attempts to return policy to normal, such as when the European Central Bank increased rates in 2011 following the financial crisis.

The BoE has been clear that rates will stay at historically low levels, even if they do rise in the near future.

Still, investors and economists are divided over the likely extent of the hikes.

Interest rate futures show a roughly 90% chance of a 15 basis point rate hike by the end of the year, and fully price in a further 25 bp increase by midway through next year.

Some economists think the MPC will go much more slowly.

“We now think the MPC will hike Bank Rate in Q2 of next year to 0.25% but that’s all they will need to do next year and that they can wait a further 12 months before having to raise Bank Rate again,” said Samuel Tombs at Pantheon Macroeconomics said.

Former BoE policymaker Andrew Sentance said a single rate hike in the near term might not be enough to get to grips with the rise in inflation which could go as high as 6%.

“They need to send a signal that they’re prepared to do something about it and some gradual rises in interest rates would give that signal,” he told BBC radio.

GRAPHIC-Expectations for BoE rate hike by end-2022 build

Reporting by Andy Bruce; Editing by William Schomberg and Toby Chopra

Our Standards: The Thomson Reuters Trust Principles.

U.S. job growth rose solidly in July amid demand for workers in the services industry

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Traders Bet BOE Will Raise Rates This Year Amid Hawkish Signals

Yahoo Finance 11 October, 2021 - 05:09am

Traders are preparing for the Bank of England to lift borrowing costs by the end of this year after two officials moved to reinforce signals of an imminent increase to curb inflation.

Money markets priced in at least 15 basis points of tightening by the BOE’s December 2021 meeting on Monday, according to sterling overnight index swaps, which would take the key rate to 0.25%. The market was previously betting the first increase would be in February.

Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action.

The repricing reflects mounting concern over the lasting impact of the latest surge in prices, with consumers facing higher costs for energy and goods, due in part to shortages that resulted from the nation’s departure from the European Union. A market-based measure of inflation 10 years from now rose to more than 4% last week, double the BOE’s target.

BOE Officials Double Down on Signals of Imminent Rate Hike (2)

The BOE “appears concerned about inflation credibility,” said Robert Wood, Bank of Amercia’s U.K. economist, adding that policy makers will “hike early” to avoid more increases later. BofA expects a 15-basis-point increase in December, followed by another 25 basis points in February, in line with market bets.

Money markets see an additional quarter-of-a-percentage point hike to take the key rate to 0.75% by August. That’s even as some investors warn that higher interest rates risk undermining the U.K.’s fragile recovery from the pandemic.

“We see the BOE jawboning in a bid to ward off the threat of inflation expectations becoming entrenched,” said Richard McGuire, head of rates strategy at Rabobank. “It seems remarkable to conceive of the BOE increasing borrowing costs as we head into Christmas.”

The moves reverberated across U.K. markets, with government bonds falling across the curve, sending benchmark 10-year yields to as high as 1.22%, a level last seen in May 2019. The pound gained to $1.3674, the strongest in two weeks before erasing its advance.

“Saunders is not quite representative of the entire MPC as he tends to be the most extreme,” said Peter Schaffrik, global macro strategist at RBC Europe. “Bailey’s comments are important as he seems to embrace tightening as well.”

A combination of higher energy prices, supply chain disruptions and rising wages in some industries has undercut the BOE’s original view that much of the jump in prices will prove transitory. The central bank last month said it expects inflation to exceed 4% in the last quarter.

(Updates market pricing, adds analyst comment in fifth paragraph, context thoughout)

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British Pound (GBP) Boosted as Bank of England Warns of Higher Interest Rates

DailyFX 11 October, 2021 - 03:00am

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